Employers that thought they would be unaffected by the city’s ordinance still could be on the hook for employees who opt to enroll in their spouse’s health care plan.

San Francisco’s controversial attempt to reduce the number of people who lack health insurance could result in employers spending thousands of dollars for employees who already have coverage.

Employers that thought they would be unaffected by the city’s ordinance because their health care spending exceeds the $1.76 per hour per employee minimum dictated by the statute still could be on the hook for employees who opt to enroll in their spouse’s health care plan, benefit experts say.

“Employers are going to scream about this,” says Susan Relland, of counsel with the law firm Miller & Chevalier Chartered in Washington.

That outrage involves the interplay of the ordinance and situations where spouses have different employers and one forgoes employer-provided health insurance for coverage provided by the other spouse’s employer.

San Francisco regulators enforcing the measure, which went into effect last month while it is being challenged in the courts, say an employer in that situation still would be required to make a health care spending contribution. Regulators say that is because what an employer spends for an employee’s coverage is unaffected by the fact that the worker has coverage elsewhere.

The only way the employer would be exempt from the spending requirement is if the employee voluntarily signs a city-prepared waiver.

The waiver advises employees that even if they receive coverage from another source, they are entitled to receive health care services from their employer. The waiver further warns that employees should not sign it if they want their employer to provide them with access to health care services.

Even without such warning, financially savvy employees may decide it is in their best interest not to sign the waiver to maximize their health coverage. By refusing to sign, and under the San Francisco ordinance employers cannot compel employees to do so, employees could have coverage as a dependent in their spouse’s health insurance plan, but their employer still would have to spend up to an annual maximum of about $3,600.

That expenditure could be made in one of several ways, San Francisco regulators say. It could, for example, be made to a medical reimbursement account that the city would administer for the employee. Alternatively, an employer could establish and contribute to a health reimbursement arrangement, which the employee could tap to pay uncovered health-related expenses.

While employees would have lavish coverage, employers would foot the bill.

Rich Stover, a principal with Buck Consultants in Secaucus, New Jersey, says all of his clients with employees in San Francisco face potential assessments, including one that could have a tab of nearly $400,000 if all affected employees refuse to sign the waiver.

“This is truly absurd. This is a law that is supposed to be about providing coverage to the uninsured,” and not about giving extra coverage to those who already have it, Stover says.

“This is a cost employers truly never considered,” says Andy Anderson, of counsel with Morgan, Lewis & Bockius in Chicago.

But ultimately, Relland says, it is a cost that will hurt employees as employers would likely cut benefits to offset the new spending requirement.

In December, a federal judge says the ordinance ran afoul of the Employee Retirement Income Security Act, which pre-empts state and local laws and rules that relate to employee benefit plans. Last month, though, a three-judge panel of the 9th U.S. Circuit Court of Appeals says the measure could go into effect pending a decision by the court on the ERISA pre-emption issue.

Last week, U.S. Supreme Court Associate Justice Anthony Kennedy denied a request by the Golden Gate Restaurant Association, the trade group that challenged the San Francisco measure on ERISA pre-emption grounds, to halt enforcement until the pre-emption issue is decided.

While legal experts say there is little likelihood of Supreme Court intervention at this stage of the litigation, some were confident that ultimately the ordinance will be found to violate ERISA pre-emption provisions.

“There is hope for an ERISA pre-emption,” says Neil Toyota, a consultant with Watson Wyatt Worldwide in Universal City, California.

“It is hard for me to see how the law would not be pre-empted by ERISA,” says J.D. Piro, an attorney with Hewitt Associates in Norwalk, Connecticut.

If cities and states were allowed to have laws like the San Francisco health care spending ordinance, multi-state employers would face dozens of different requirements, making it impossible for them to offer a uniform benefit package and significantly increasing their administrative costs, which ERISA pre-emption was intended to prevent, Relland says.